Running on Empty: Argentine Biodiesel Industry’s Fight to Survive

As the door closes on its largest export market, the future of the Argentine biodiesel industry is uncertain, threatening to disrupt a major pillar of the country’s economy: the soybean chain.

Last month the European Union levied definitive anti-dumping duties on Argentine biodiesel exports, between US$300 and 340 per tonne, a 22-25% increase on the current price which the EU believes is “unfairly low.” The duties, also applied to Indonesia at a lower rate, will come into effect at the end of this month and are renewable after five years.

Argentina’s Foreign Affairs Ministry has labelled the measures “clearly protectionist” and has vowed to challenge the decision before the World Trade Organisation (WTO), but any international challenge may come too late for Argentine biodiesel producers, already suffering from provisional tariffs introduced in May. Biodiesel producers say losing the EU export market will collapse the industry and are calling on the Casa Rosada to implement measures to increase domestic consumption of their product.

Biodiesel Exports: From Boom to Bust

Argentina ranks as the world’s largest biodiesel exporter, with 90% of it exports sold in the European market. Since 2008 Argentina’s biodiesel exports have grown exponentially; in 2009 the total of Argentine exports almost doubled from the previous year, from 724,792 tonnes to 1,149,663 tonnes. Over the last three years average export volumes have remained high at 1.5m tonnes, according to figures from Argentina’s Chamber of Biofuels (Carbio). Both Argentina’s and Indonesia’s entry into the EU market were assisted by the five-year anti-dumping duties imposed on US biodiesel products in 2009.

The large quantity of biofuel Argentina is able to produce is a side effect of the country’s role as a major producer of soybeans and soy oil (used to make biodiesel). Diego Wassner, an agricultural engineer and academic in the Faculty of Agromony at the University of Buenos Aires, explains the rapid growth as the result of an efficient, modern, and large-scale soy industry, as well as the location of plants close to ports which contribute to low transport costs.

Wassner also explains that a favourable export tax regime gave businesses incentives to turn raw soybean oil into biodiesel inside Argentina’s borders. Soybean exports are taxed at 35%, in the context of deductions, soy oil exports are taxed at 32% and biodiesel exports at just 18%, Wassner told The Argentina Independent. European biodiesel producers have taken issue with this tax regime, as they believe it gives Argentine producers an unfair advantage in the international market.

In 2012, the EU began two investigations into dumping and the application of subsidies in Argentine biodiesel, at the request of the European Biodiesel Board (EBB), a group that represents the interest of European biodiesel producers. As a result the EU applied provisional duties in May 2013 of between 6.8% and 10.6% to Argentine biodiesel imports for a six-month period.

Since the provisional duties were imposed in May, Argentine biodiesel exports have plummeted. According to data produced by Oil World, biodiesel exports to the EU have fallen by 71% in the first seven months of this year compared to the same period of 2012. Carbio estimates that foreign sales with the provisional duty applied may not exceed 500,000 tonnes in 2013 (a third of the average exports over the last three years). The drastic drop in exports will cost the industry more than US$1bn this year, according to estimates.

Accusations of Dumping

The EBB said in 2012: “The abnormality of biodiesel prices artificially set in Argentina and in Indonesia results in distorting the international trade flow and greatly damages growth and viability of the European industry.” Specifically the EBB have aimed their criticisms at Argentina’s differential export tax regime whereby final products (biodiesel) are sold at a much lower price than raw material used to make them (soy beans or soy oil).

The EBB alleges this tax regime allows for Argentina and Indonesia to ‘dump’ biodiesel on the European market. The WTO states dumping occurs when the price of a product sold in the importing country is less than the price of that product in the market of the exporting country. However, Argentina disputes the EU method used to calculate the local price, believing they have arrived at a much higher figure.

Francisco Pampuro, an economist specialising in the biofuels sector from economic analysis website abeceb.com told The Argentina Independent the internal price was determined by using “the costs of production of the most inefficient operator, located in the most remote area of the country.”

“Under these conditions the EC (European Commission) did not consider that the internal Argentine prices were determined under normal market conditions and, therefore, estimated the ‘normal price’ separately from the costs of Argentine companies making a reasonable profit,” Pampuro said.

Silos of soy in the fields of Junin. (Photo by Nicolás Lope de Barrios)

Both Carbio and Argentina’s Foreign Affairs Ministry have called the measures “protectionist”. “European tariffs were imposed as part of the crisis that has engulfed the bloc since 2010 and [they are] seeking to revive an industry that is inefficient in most of the countries that compose it,” Pampuro said. He explained Europe does not produce enough raw materials, which raises the cost of production.

According to Wassner, the key to competing in the biodiesel market is an abundance of vegetable oil, the cost of which represents approximately 85-90% of the total cost of biodiesel. “The problem in Europe is that they have a large installed capacity for production of biodiesel but not enough oil to make it work properly, so the internal pressure of this business group is high,” he said.

The EU and Argentina’s Rocky Trade Relationship

Argentina has said the dumping allegations lack “a justified legal and factual basis” and the Foreign Affairs Ministry announced plans to take the matter to the WTO. “The extent of damage this measure will cause to the industry, which has recently developed in a dynamic and innovative manner, coupled with the clearly protectionist nature [of the tariffs], leaves no option but for Argentina to take immediate action under the Dispute Settlement Understanding of the WTO.” the Foreign Affairs Ministry stated.

The European Union has defended the rise in tariffs as a decision that “is part of the trade defence proceedings provided and supported by the World Trade Organization,” and are also “subject to strict compliance with WTO rules and those of the EU.”

The Union and Argentina have a history in the WTO. In May this year Argentina lodged a case requesting consultations on the EU’s restrictions on the importation and marketing of biodiesel in the 28-nation bloc, as well as claims that the EU is unfairly subsidising its domestic industry. In December 2012 the EU took Argentina to the WTO over import restrictions which, they argue, “violate international trade rules and harm EU exports.”

The Argentine Foreign Affairs Ministry has accused the EU of applying a double standard to international trade, especially agriculture. “Europe managed to impose differential and unequal treatment that enabled their primary producers to not have to compete with less developed countries; the large European agricultural subsidies are today the best example of the asymmetry mentioned,” according to a report recently released by the department.

The report also details the number of complaints made to the WTO between 1995 and 2013. The EU and its member countries had 110 demands made against them at the, the second highest number after the US. For its part, Argentina has been the subject of 22 complaints against their trade practices at the WTO.

Countries which had complaints filed against them at the WTO, by number of complaints received (graph courtesy of Argentine Foreign Affairs Ministry)

Wider Impact: Dwindling Reserves

The picture does not look much brighter for local biodiesel producers in 2014, with export numbers expected to drop even further. From 1st January 2014 Argentina, along with several developing countries, will lose the benefits of the Generalised Scheme of Preferences (GSP), which offers tariff reductions to developing countries. Removing the GSP of 6.5% will bring the total tariff on Argentine biodiesel to around 30%, according to Carbio, making exports unviable.

Pampuro believes that due to the size of the tariff, external sales of biocombustibles will be badly hurt in 2014 and exports could fall below 2008 volumes. In 2007 the fledging biodiesel industry exported just over 168,000 tonnes. The drop in exports this year “represents a decline of more than US$800 million with respect to 2012… In 2014, exports would be even lower and the drop in value terms compared with 2013 would be around US$500 million,” Pampuro said.

If they cannot find a market for their product, biodiesel producers may be forced to export the less lucrative soy oil. President of Carbio, Luis Zubizarreta warns that if soybean oil is not processed into biodiesel, this “will cause an even greater oversupply of a product in the international market, resulting in a fall of prices of oil and soybean that will affect revenues, investment, and employment in our country within the soybean chain.”

The lost export revenue, to the tune of over US$1bn, could have an impact on the country’s foreign currency reserves. Trade provides most of the US dollars Argentina depends on to pay its creditors and import costs, and the Central Bank’s foreign currency reserves dropped to US$33.97bn in October. Argentina has lost 22.7% of its reserves this year.

The Foreign Affairs Ministry has vowed to challenge the duties at the WTO as soon as they are enforced, to protect “the production, foreign sales, and jobs generated in our country for the sector.” But this may prove too late, and biodiesel producers are already looking for alternatives to revive the industry.

One option is to look for new markets, “During 2012 exports to Peru and the US have grown. However it will be difficult in the short term to have a destination with the capacity to import at the levels of the European Union,” Pampuro said.

In the absence of a viable external market options, biodiesel producers have turned their attention to the domestic market. On 1st November Zubizarreta sent a letter to President Cristina Fernández de Kirchner expressing concerns about the low level of production biodiesel plants are facing. “Today they are working at 40% capacity and this will be seriously exacerbated by recent protectionist measures that the European Union seeks to definitively impose on Argentine biodiesel,” Zubizarreta wrote.

Zubizarreta asked the government to increase the domestic consumption of biodiesel to revive to sector, outlining two measures to achieve increased biodiesel consumption in the local market and to replace imported oil:

Legislating to increase the percentage of biodiesel in petroleum from 7% to 10% to stimulate local demand. “The current demand for biodiesel in the domestic market is just over 800,000 tonnes per year. If increased to 10%, demand could reach 1,416,000 tonnes… Additionally, you could use special cuts of 20% in power generation, agriculture and heavy automotive transport,” said Claudio Molina, executive director of the Argentina Association of Biofuels and Hydrogen.

To apply the same tax treatment to biodiesel as imported diesel fuel. Currently, imported diesel is exempt from the 41% levied on fossil fuels in the domestic market. When sold in locally, biodiesel taxation is composed of a 19% Transfer to Liquid Fuels and Natural Gas tax and a 22% Transfer to Diesel tax. Carbio argues that if equal tax treatment was applied, Argentine biodiesel would be cheaper than the diesel the country imports.

It is unsurprising that the industry has turned to the government that helped nurture it to become the world’s biggest exporter of biodiesel. However, for now it seems the fate of this once lucrative industry is in the hands of external factors, relying on the world of politics rather than the rules of economics.

We asked Argentines what do they think the government should do to help the biofuel industry. Click here to read their responses.